The Supreme Court of the United States applied a multi-factor test to rule that a regulation prohibiting construction on an undersized lot contiguous to a second lot under common ownership was not a taking.

In the broadest sense, takings can occur three ways. First, the government can exercise eminent domain to legally acquire property rights and pay just compensation. Second, the government can physically invade property without legally acquiring property rights, creating a cause of action in which the owner can demand just compensation. Finally, the government can impose regulations that so restrict the owner's use of property that a cause of action can arise. The Supreme Court of the United States ("SCOTUS") recently issued an opinion addressing a preliminary question in a regulatory takings case involving identification of the unit of property being evaluated.

When a property owner owns multiple parcels of land, a preliminary question in a regulatory taking involves identifying the property at issue. For example, the impact of wetland regulations on a ten acre swamp is dramatically different if the entire parcel is ten acres or if that ten acres is part of a 100 acre property. This evaluation is often called the "denominator test," with the impacted area being the numerator. In that same example, if the denominator is the ten acre swamp, from a simplistic perspective the impact is 100% (10 acre swamp/10 acre parcel). If the denominator is the 100 acre parcel, then the impact is 10% (10 acre swamp/100 acre parcel).

On Friday, June 23, 2017, SCOTUS issued Murr v Wisconsin, which addresses the denominator test. In that case, land along the St. Croix River was subject to regulations prohibiting development on parcels with less than one acre of developable land. The property owners owned two adjacent lots that both enjoyed less than the acre threshold of developable land. As a result, the owners could not sell one lot for development purposes. A lawsuit ensued. The key issue focused on whether the regulatory taking test would be applied to the single lot that the owners wished to sell or both lots.

SCOTUS reviewed basic regulatory takings requirements. "Regulatory takings jurisprudence recognizes that if a 'regulation goes too far it will be recognized as a taking.' This area of the law is characterized by 'ad hoc, factual inquiries, designed to allow careful examination and weighing all of the relevant circumstances.'"

There is not a clear description of what going "too far" entails.

First, "with certain qualifications... a regulation which 'denies all economically beneficial or productive use of land' will require compensation under the Takings Clause." Second, a taking may be found based on a complex of factors, including (1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with district investment-backed expectations; and (3) the character of the governmental action. Yet even the complete deprivation of use under [the test from one case] will not require compensation if the challenged limitations "inhere... in the restrictions that background principals of the State's law of property and nuisance already placed upon land ownership."

The law remains "flexible" in order to balance "the individual's right to retain the interests and exercise the freedom at the core of private property ownership, and the government's power to 'adjust rights for the public good.'"

In Murr, SCOTUS retained the notion of flexibility in its decision when evaluating the proper unit of property to apply its takings analysis. SCOTUS rejected the owners' request for a bright line test that applies the takings analysis to only the specific parcel of property at issue. Similarly, it rejected Wisconsin's request for a bright line test that applies the analysis to all of the owners' parcels. SCOTUS applied an "objective" analysis to identify "whether reasonable expectations about property ownership would lead a landowner to anticipate that his holdings would be treated as one parcel, or, instead, as separate tracts." SCOTUS identified three factors: "[1] the treatment of the land under state and local law; [2] the physical characteristics of the land; and [3] the prospective value of the regulated land." Analyzing the third factor should give "special attention to the effect of burdened land on the value of other holdings."

Chief Justice John Roberts dissented and was joined by Justices Samuel Alito and Clarence Thomas, who also issued his own separate dissent. The dissenters were concerned that governments would be able to regulate around this decision in a manner that expands their powers at the expense of property owners.

All in all, this case was a setback for private property owners both in terms of the rejection of the bright line test requested by the owners and the application of the facts of this case to the test adopted. At least it continues the type of flexible analysis that leaves the question of whether a taking has occurred open to determination by rejecting the test advocated by the government.

In addition to representing private property owners in condemnation cases, Clark Hill assists owners in local zoning issues, including appearing before local bodies like planning commissions and zoning boards of appeals as well as litigating appeals from those bodies. Clark Hill also handles formal eminent domain, physical invasion, and regulatory taking matters.

If you have any questions regarding this alert, please contact Stephon B. Bagne at (313) 965-8897 | sbagne@clarkhill.com or another member of Clark Hill's Real Estate Practice Group.

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